NC Budget Enacted Despite Gov. Perdue Veto

The NC House and Senate enacted the 2011-2012 budget on Wednesday, June 15, 2011 despite the veto from Gov. Beverly Perdue. The $19.7 billion budget contains several changes affecting NC tax law. The NC state sales tax will be cut by 1% on July 1, 2011. In addition, the temporary surtax on corporate and individual income taxes will expire. The full text of the House Bill 200 (now Session Law 2011-145) can be downloaded at the NC General Assembly website. (http://www.ncga.state.nc.us/)

--- Donna Boyette, CPA, Senior Staff Accountant
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The North Carolina General Assembly overrode Gov. Bev Perdue’s veto and enacted a budget bill that adopts federal adjusted gross income rather than federal taxable income as the starting point for computing North Carolina personal income tax, enacts a new net business income tax deduction, and retroactively modifies the capital stock base for purposes of determining a taxpayer’s corporate franchise tax liability. The new starting point and deduction are effective beginning with the 2012 tax year. Notably absent from the bill is the extension of the temporary income tax surcharge and the temporary increase in the sales and use tax rates that were enacted in 2009.

The new personal income tax net business income tax deduction is equal to the first $50,000 of net business income minus any passive income the taxpayer receives during the taxable year. By adopting federal adjusted gross income as the starting point, North Carolina no longer incorporates the federal standard deduction or personal exemption amounts and, therefore, no longer requires the corresponding North Carolina adjustments beginning with the 2010 tax year. The standard deduction amount will be set as follows depending on the taxpayer’s filing status:

• Married, filing jointly—$6,000
• Head of Household—$4,400
• Single—$3,000
• Married, filing separately—$3,000

The personal exemption amount will be $2,500 for taxpayers with incomes up to the following limits:

• $100,000 for taxpayers filing married, filing jointly
• $80,000 for taxpayers filing as heads of household
• $60,000 for single taxpayers
• $50,000 for taxpayers filing married, filing separately

The personal exemption for taxpayers with incomes above these thresholds will equal $2,000. Reserves for amortization of intangible assets as permitted for income tax purposes are deducted from the capital stock base for purposes of determining a taxpayer’s corporate franchise tax liability, effective retroactively to post-2006 tax years. Previously, the statute only authorized the deduction of reserves for depreciation of tangible assets in the capital stock base.

--- Written by CCH Incorporated

Tax Tip: Organizing Your Tax Information Throughout the Year

Now that tax season is over, you might think, “what can I do to make this process easier?”. There are many approaches to handling the myriad of paperwork we face every day, but you have to find the one that works for you. Some people like to keep everything related to their monthly bills, while others throw out all but the most important items. I believe there needs to be a happy medium.

No matter how you track your payments, whether it is through a special software program, such as Quicken, Quickbooks, Excel spreadsheets or just keeping up with your checkbook, you will need to retain your receipts for a certain period of time. Refer to our Record Retention Guidelines found at the bottom of the “What’s New” page on our website, then start the process of preparing for next year right now!

I like to put my bills in monthly files, then at the end of the year, throw out all insignificant non-tax related items. I keep such receipts as those related to car maintenance & repairs, large items purchased that might have a warranty or that I expect to last more than a year, improvements to my home, and other important documents. I have what would be considered permanent files where these items go. As year-end information comes in, I put them all in one special file.

Some people prefer to toss the unnecessary monthly bills each month. These bills might include supplies purchased for personal use, cable TV bills, etc. If you work at home, be careful when it comes to utility, telephone and other bills which might be used to calculate a home office deduction. For the bills you keep, always make a note as to the date paid, check number and the amount, if different from the bill. This notation will help you track the payment should the need arise.

If you’re in the habit of tossing, rather than keeping, then you will still need a place to corral the important documents. If you’re not a person who will file, then a large manila envelope might just be the ticket. You can have one for each category that is needed to easily find the receipt later, such as, medical expenses, auto expenses, property taxes, insurance, etc. Some people like to have a box or bin of some sort where they can easily accumulate a year’s worth of payments. This necessitates a lot of rummaging if you find that you need to refer to a bill later.

Whatever your style, you want to make sure that come tax time next year, you have the information readily available to complete the organizer. Even if you don’t complete the organizer, you can use it to check off the information you have to reveal what is left to gather. Then before you make your appointment for your tax preparation, you can see whether you have received all your Form 1099s and if you need to obtain more receipts for your expenditures. The more prepared you are for the meeting, your tax advisor is better able to give you the best service possible. That’s where I’m coming from.

--- Rosa Read, CPA – Senior Staff Accountant

North Carolina Scheduled to Reduce Sales and Use Tax Rate on July 1

The NC Department of Revenue reminded taxpayers on Friday May 13 that the State sales and use tax rate is scheduled to decrease on July 1. The announcement is posted on the NC Department of Revenue website. However, July 1 is still several weeks away, so don't reprogram your cash registers yet! The NC General Assembly could still enact legislation to extend the higher tax rate. Legislation has already been introduced to extend the rate through 2013 (House Bill 884, Extend Temporary Sales Tax Rate Increases 2 Years). Check this blog and our Twitter page for the latest developments. Attached is an excerpt of the notice from the NC Department of Revenue.

--- Donna Boyette, CPA, Senior Staff Accountant

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State Sales and Use Tax Rate Scheduled to Decrease July 1, 2011
The general State sales and use tax rate is scheduled to reduce from 5.75% to 4.75% effective July 1, 2011. You are encouraged to check the Department’s website for updates to stay informed of any changes as proposed legislation has been introduced that may affect the State tax rate reduction.

Effective July 1, 2011, the general State tax rate applicable to sales and purchases of tangible personal property, certain digital property, and certain services is 4.75%. As a result, the general State and local tax rate will be 6.75% in eighty-two counties, 7% in Alexander, Catawba, Cumberland, Duplin, Haywood, Hertford, Lee, Martin, New Hanover, Onslow, Pitt, Randolph, Robeson, Rowan, Sampson, Surry and Wilkes Counties, and 7.25% in Mecklenburg County.

Effective July 1, 2011, gross receipts derived from providing telecommunications service, ancillary service, and video programming in this State, and sales of spirituous liquor other than mixed beverages are subject to the “combined general rate” of 7% for every county in the State. The combined general rate is the State’s general rate plus the sum of the rates of local taxes authorized for every county in the State.

Taxpayers that file Form E-500, Sales and Use Tax Return, should report taxable purchases for use and taxable receipts at the 4.75% Gen. State Rate on the existing returns. The Department will not create and provide new returns.

Taxpayers that file Form E-500E, Utility and Liquor Sales and Use Tax Return, should report the tax liability on the existing returns. Prior to August 1, 2011, a worksheet will be created and posted by the Department on its website for use in completing Form E-500E returns.

Additional information regarding the general State sales and use tax rate will be posted by the Department on the website prior to July 1, 2011. Questions about the notice should be directed to the Taxpayer Assistance Call Center at telephone number 1-877-252-3052 (toll-free).

http://www.dor.state.nc.us/taxes/sales/impnotice_2011_05_13.pdf

Roth Part II - To Convert to a Roth or not to Convert – The Answer is Maybe

The Roth IRA has been around for more than a decade, so why have you been hearing so much about it over the last year? Before 2010, taxpayers with AGI, or Adjusted Gross Income, over $100,000 were not allowed to convert or to roll over funds from traditional (deductible or non-deductible) IRA accounts or certain employer-sponsored retirement plans (ex. 401(k) plans) to a Roth account. For 2010 and later, taxpayers of all income levels and filing statuses can convert to a Roth account.

Traditional, deductible IRA accounts and employer-sponsored retirement plans allowed people to exclude their contributions when figuring their taxable income. That is one of the beauties of the traditional IRA and other retirement plans – do not pay tax on the money now, but pay the tax on the withdrawals years later.

So what happens when you convert to a Roth IRA? When the money is converted to a Roth IRA account, income tax is paid on the funds in the year of the conversion. How much tax you pay in the year of conversion is a complex formula based on your tax rate and the value of your IRA accounts at the time of conversion. Only for 2010, the income from the conversion will not be recognized in 2010, but half will be recognized in 2011 and half will be recognized in 2012.

So if you report the converted amount as income and pay income tax, why would you convert? Isn’t better to wait and pay the tax when you withdraw the money from the account? The decision to convert boils down to several questions:
1. do you have the money to pay the tax now from accounts other than the IRA;
2. what do you plan to do with the money in the future;
3. how long do you have until retirement; and
4. what do you think the tax rates will be when you retire.

There is no right answer. In fact, there are several professional software programs designed to help your tax adviser walk through the possibilities to see if a conversion is right for you.

What if you decide you do not want to convert after the paperwork is signed? You can take advantage of the "free look" provisions in the law. These rules allow you to reverse or "recharacterize" your Roth converted amounts back to a traditional IRA. However, the recharacterization must be done by the time you file your tax return, including the extension period.

With concerns about the overall economy, sluggish investment returns, lower retirement account values and potential future increases in tax rates, the time could be right to recognize income today with the thought of finding tax savings in the future.

--- Donna Boyette, CPA, Senior Staff Accountant

UPDATE - NC Governor Signs Conformity Bill

On March 17, 2011, Gov. Beverly Perdue signed legislation that would accept some, but not all, of the changes created in the federal tax law by the 2010 Jobs Act and the 2010 Tax Relief Act, both enacted in late 2010. Below is a summary of the provisions of the new law.

With this new law, the 2010 depreciation rules are different for NC income tax purposes and federal income tax purposes. It is important to make the necessary adjustments on the 2010 NC income tax return, if you take advantage of the expanded federal provisions.

This new development may significantly impact your return for 2010. Give us a call if you have any questions about how this new legislation affects you.

--- Smith Miller & Buff, CPA, PA team
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North Carolina Gov. Beverly Perdue has signed legislation that updates the state's Internal Revenue Code (IRC) conformity date from May 1, 2010, to January 1, 2011, for personal and corporate income tax purposes, thereby incorporating most of the amendments made by the Small Business Jobs Act of 2010 (2010 Jobs Act) and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act), effective March 17, 2011. However, any amendments made to the IRC after May 1, 2010, that increase North Carolina taxable income for the 2010 taxable year become effective beginning with the 2011 tax year. In addition, the legislation partially decouples from federal amendments made by these federal acts that increased and extended the IRC §168 bonus depreciation deduction and the IRC §179 asset expense deduction.

Bonus Depreciation
The 2010 Jobs Act extended the 50% bonus depreciation provision to property placed in service in taxable years 2010 and 2011. The 2010 Tax Relief Act boosted the 50% bonus depreciation to 100% for property acquired and placed in service after September 8, 2010, and before January 1, 2012, and it provided 50% bonus depreciation for property placed in service during the 2012 calendar year. The amendments made by this bill partially decouple from the extension of the IRC §168(k) additional bonus depreciation and the IRC §168(n) additional bonus depreciation deduction for disaster-related property by requiring taxpayers to make an addition adjustment on the North Carolina return equal to 85% of the deduction claimed on the 2010 through 2012 federal returns but allowing taxpayers who make the addition adjustment to subsequently deduct the amount added back ratably over a five-year period.

IRC §179 Asset Expense Deduction
The legislation also partially decouples from the increase and extension of the IRC §179 asset expense deduction for the 2010 and 2011 taxable years. Prior to the enactment of the 2010 Jobs Act the deduction limit was $250,000 and the investment limit was $800,000 for both federal and North Carolina income tax purposes. The expensing limits were scheduled to revert to their prior levels in 2011. Amendments made by the 2010 Jobs Act and the 2010 Tax Relief Act did the following:
• expanded the deduction limits from $250,000 to $500,000 for the 2010 taxable year and from $25,000 to $500,000 for the 2011 taxable year;
• expanded the investment limits from $800,000 to $2 million for the 2010 taxable year and from $200,000 to $2 million for the 2011 taxable year;
• expanded the deduction limit from $25,000 to $125,000 for the 2012 tax year;
• expanded the investment limit from $200,000 to $500,000 for the 2012 tax year; and
• broadened the definition of "qualified property" to include certain real property investments for the 2010 and 2011 taxable years.

Thereafter, the expensing deduction and investment limits are scheduled to revert in 2013 to their prior levels of $25,000 and $200,000, respectively. Amendments made by the bill signed by Gov. Perdue maintain for North Carolina income tax purposes the 2010 deduction and investment limits of $250,000 and $800,000 for taxable years 2010 and 2011. The legislation requires taxpayers to add back on their North Carolina return 85% of the additional expensing taken under federal law in 2010 and 2011, but allows taxpayers to deduct 20% of the add back amount over the succeeding five years. North Carolina will conform to the expensing limits of $125,000/$500,000 for the 2012 taxable year and also conforms to the expansion of the definition of "qualified property" to include certain real property investments for the 2010 and 2011 tax years.

H.B. 124, Laws 2011, effective March 17, 2011, and applicable as noted

--- written by CCH Incorporated

NC Legislation Update - One Step Closer to Conformity with New Federal Tax Laws

On March 1, the NC State Senate will discuss S.B. 94, which would accept, for North Carolina income tax purposes, several provisions of the recently enacted federal tax legislation. However, several provisions are not expected to be accepted. Check back for future updates on this important tax development.

--- Smith Miller & Buff, CPA, PA team
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Legislation has been approved by the North Carolina House and Senate Committees on Finance that, if enacted, would generally update the state’s Internal Revenue Code (IRC) conformity date from May 1, 2010, to January 1, 2011, for personal and corporate income tax purposes. However, the legislation would partially decouple from federal amendments made by the Small Business Jobs Act of 2010 (2010 Jobs Act) and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) that increased and extended the IRC §168 bonus depreciation deduction and the IRC §179 asset expense deduction.

Bonus Depreciation

The 2010 Jobs Act extended the 50% bonus depreciation provision to property placed in service in taxable years 2010 and 2011. The 2010 Tax Relief Act boosted the 50% bonus depreciation to 100% for property acquired and placed in service after September 8, 2010, and before January 1, 2012, and it provided 50% bonus depreciation for property placed in service after December 31, 2012, and before January 1, 2013. If the North Carolina legislation is enacted, North Carolina would partially decouple from the extension of the IRC §168(k) additional bonus depreciation and the IRC §168(n) additional bonus depreciation deduction for disaster-related property. Taxpayers would be required to make an addition adjustment equal to 85% of the deduction claimed on the 2010 through 2012 federal returns but could subsequently deduct the amount added back ratably over a five-year period.

IRC §179 Asset Expense Deduction

Similarly, the legislation would partially decouple from the increase and extension of the IRC §179 asset expense deduction for the 2010 and 2011 taxable years. Prior to the enactment of the 2010 Jobs Act the deduction limit was $250,000 and the investment limit was $800,000 for both federal and North Carolina income tax purposes. The expensing limits were scheduled to revert to their prior levels in 2011. Amendments made by the 2010 Jobs Act and the 2010 Tax Relief Act did the following:

• expanded the deduction limits from $250,000 to $500,000 for the 2010 taxable year and from $25,000 to $500,000 for the 2011 taxable year;
• expanded the investment limits from $800,000 to $2 million for the 2010 taxable year and from $200,000 to $2 million for the 2011 taxable year;
• expanded the deduction limit from $25,000 to $125,000 for the 2012 tax year;
• expanded the investment limit from $200,000 to $500,000 for the 2012 tax year; and
• broadened the definition of "qualified property" to include certain real property investments for the 2010 and 2011 taxable years.

Thereafter, the expensing deduction and investment limits are scheduled to revert in 2013 to their prior levels of $25,000 and $200,000, respectively. If enacted, the North Carolina legislation would maintain the 2010 deduction and investment limits of $250,000 and $800,000 for taxable years 2010 and 2011. The proposed legislation would require taxpayers to add back 85% of the additional expensing taken under federal law in 2010 and 2011 and would allow taxpayers to deduct 20% of the addback amount over the succeeding five years. The proposal would conform to the expensing limits of $125,000/$500,000 for the 2012 taxable year and would also conform to the expansion of the definition of "qualified property" to include certain real property investments for the 2010 and 2011 tax years.

H.B. 124 and S.B. 94, as approved by the House and Senate Committees on Finance, February 23 and 24, 2011; H.B. 124 Legislative Fiscal Note, General Assembly of North Carolina Fiscal Research Division, February 22, 2011

--- CCH Incorporated

Roth Part I - So What Is So Special About the Roth IRA?

The Roth IRA has been around for more than a decade. For 2010 and later, Congress removed the income and filing status restrictions on conversions to Roth IRAs. This caused a flurry of interest in Roth IRAs and their tax advantages.

The current tax law prevents higher income people from depositing directly into a Roth account (for example, married taxpayers with AGI [Adjusted Gross Income] over $167,000 to $177,000 for 2010). However, with the income restriction on conversions lifted, taxpayers of all earned income levels, and regardless of what type of retirement plans they have at work, can deposit, or contribute, funds into a non-deductible IRA (contributions are not deducted from income). The funds can then be converted to a Roth IRA. This strategy has caused a lot of buzz about Roth IRAs, since they are now open to almost everyone.

Traditionally, tax advisors have told their clients that it is better to take the deduction today and recognize the income later. However, as the tax laws change, this advice may not apply to your situation. With concerns about the overall economy, sluggish investment returns, lower retirement account values and potential future increases in tax rates, the time could be right to recognize income today with the thought of having tax savings in the future.

Roth accounts can offer a great tax savings in the right circumstances. Withdrawals from Roth IRA accounts are tax free if you follow the rules to make it a penalty-free, or qualified, withdrawal. Unlike the other retirement accounts, interest, dividends and the appreciation in account value are never taxed. Withdrawals are considered to be qualified withdrawals if the account owner is over 59 ½, the five-year waiting period since the account was established has passed or the withdrawal is a result of death, disability or used in the qualified purchase of a new home. There are also special provisions that allow the owner to withdraw their contributions, but not the earnings, without meeting the requirements above. However, you should seek advice before withdrawing funds for other than qualified reasons to avoid the 10% early withdrawal penalty.

Roth accounts do not require distributions (required minimum distributions or RMD) when the account holder reaches 70 ½. This allows the account to grow tax free until the funds are needed. The account holder can also pass the account to his or her heirs. In fact, people over 70 1/2 that have earned income, and meet the other requirements, can contribute directly to a Roth IRA. This is not possible with a traditional IRA.

As new developments emerge it’s important that people look at all the options and seek professional advice before converting to a Roth IRA. For example, with the signing of the Small Business Job Act in September 2010, some employers will begin offering a Roth 401(k) option. This adds another layer of complexity to an already difficult decision.

In Part II of this series, I will review why you might want to convert from a traditional IRA to a Roth IRA.

Everyone's situation is different. Get help from a trained CPA when you have questions.

--- Donna Boyette, CPA, Senior Accountant

Why You Might Not Want To Rush To File For Your Refund

You have your W-2, your tax deductions are all identified and you are hoping that a big refund is in your future. You rush to your tax preparer or your computer. Not so fast! Depending on your situation, filing your return early this year might cost you money. Why? Late year tax law changes.

Congress was so late in enacting some new tax laws that the IRS and state governments are working hard to catch up. The Jobs Act of 2010 (signed into law 9/27/10) and the Tax Relief Act of 2010 (signed into law 12/17/10) have several changes effective for 2010 that could affect millions of taxpayers. This caused delays in the IRS finalizing their forms and caused software companies to make last minute changes to their software.

The good news is that most software companies have completed their program changes. Check your software to make sure it is up to date before filing your return. According to their website, the IRS will be able to start processing the returns affected by the new law on February 14.

The bad news is that the NC General Assembly, as of press time, had not accepted the Jobs Act of 2010 or the Tax Relief Act of 2010. Since North Carolina returns start with your Federal income, you may get the benefit of the new laws on your federal return, but not on your state return.

There is hope! As of February 7, the General Assembly was still in session. They may still vote to accept these new federal tax laws for North Carolina tax purpose. It may be worth waiting to file your return to find out. But don’t wait too late! You need to file your return, or file an extension, by April 18, 2011.

Everyone's situation is different. Get help from a CPA when you have questions.

--- Donna Boyette, CPA, Senior Accountant

NC Accepts the April 18 Deadline, but It's Not That Simple

It’s official. The IRS has given everyone an extra weekend to file your taxes this year. Returns normally due on April 15, 2011 will now be due on April 18, 2011. The reason? The District of Columbia’s Emancipation Day holiday will be observed on April 15 this year.

On their website, the NC Department of Revenue announced on February 1 that they will follow the federal due date for certain returns. Sounds simple? Not quite. The State has extended the deadline for some returns and payments, but not all. The following are listed on their website as due April 18, 2011:

• 2010 State individual income tax returns, whether filed electronically or on paper
• First quarter 2011 individual estimated income tax payments - this is a change from an earlier announcement in January
• Partnerships
• Estates and Trusts
• Applications for extension for any of the above tax forms

North Carolina returns for calendar year corporations and certain fiscal year corporations are still due April 15, 2011. There is no change in the filing date. Corporate first quarter estimates originally due April 15 are still due April 15 as well. Don’t let the extra weekend confuse you. Mail those corporate returns on or before April 15 to avoid penalties.

Everyone's situation is different. Get help from a CPA when you have questions.

--- Donna Boyette, CPA, Senior Accountant

A Tax Benefit for Those That Depend on You

In case it wasn't difficult enough to raise a child or care for an aging family member, you have to navigate a maze of exceptions in the US tax code to figure out if you can claim someone as a dependent. Terms like "qualifying child" and "qualifying relative" are enough to make anyone's head spin.

There are some general factors listed in the tax code to consider when determining if you can claim someone on your income taxes. The person may be a qualifying child if they meet all six of the following criteria:

• Citizenship - The person must be a citizen, national, or resident of the US, Canada or Mexico.
• Relationship - The person is a child, brother, sister or is their descendent (grandchild, niece, nephew, etc.).
• Age - The person must be under age 19 at the end of the year, under age 24 at the end of the year and a full-time student, or any age and "totally and permanently disabled".
• Principal Place of Abode - The person must live with you for more than half the year. There are special exemptions that apply for separated and divorced parents.
• Support - You must have provided more than 50% of their support for the year.
• The person cannot file a Joint Return with someone else, with few exceptions

Do you support someone that doesn't meet all of these criteria? That person may be your qualifying relative instead if they meet all five of these criteria:

• Citizenship – same as for qualifying child
• Relationship - The qualifying child rules are expanded to include parents, grandparents, uncles, aunts, in-laws and members of your household for the entire year.
• Income - The person's gross income (before deductions) must be less than $3,650 in 2010.
• Support – same as for qualifying child
• Not a Qualifying Child of you or anyone else

Most importantly, a person can only be a dependent on one person's tax return. If you and your ex-spouse both claim your child, you could get a letter from the IRS or your electronically filed return will be rejected. Same goes if your married child or college-age child claims himself.

Everyone's situation is different. Get help from a CPA when you have questions.

--- Donna Boyette, CPA, Senior Accountant